The Path to 100% Climate-Smart Finance

Background

On Wednesday, April 18, at the UN Foundation, halfway between the White House and the headquarters of the World Bank, we hosted the 11th working session of the Acceleration Dialogues, with a focus on economy-wide resilience intelligence. Participants explored technical challenges and collaborative pathways to achieving 100% climate-smart finance by 2038, through the building of the Resilience Intel climate-smart finance information service.

Deploy a directional ratings system that can apply to any entity, in any sector.

Climate ‘XROI’

At today’s level of connectedness, interactivity, consumption, and resource depletion, our collective externalities are putting vital natural systems at risk, stressing public budgets, and insinuating into nearly every kind of investment hidden opportunity costs and structural risks. External return on investment (XROI) is now a vital indicator of inherent and future value, a measure of complex interactions, for which we need to develop high-confidence metrics and decisional insight.

In this Dialogue, participants discussed the need to align the value, intention, and action of financial capital with the sustainable expansion of natural capital and human capital. The resilience of national economies requires open access to quality education, sustainable relationships to natural resources, and a reliable understanding of the real day-to-day value of hidden (non-monetized, non-market) critical influences.

The Soil Ecology Opportunity

Well-designed land value policies can reward the building of carbon-rich soil ecology, creating an incentive for sustainable farming practices. If farmland property valuations account for soil carbon content and ecological resilience, and the higher-value equity is coupled with tax incentives for carbon-rich farming practices, the resulting value differential will make its way to market.

As the difference in value between unsustainably farmed and sustainably farmed food becomes evident, commodities markets will capitalize on the value differential and enhance the reward for better practices. A new market for organic and sustainable produce will emerge within existing commodities markets, mainstreaming healthier food, because the value differential makes it attractive.

Resilience intelligence is the uncovering of such hidden threads of expanding value. A central design element for ensuring that such innovations take root and become reliable drivers of sustainable value is to ground financial and economic data in Earth systems observations.

An Operational Framework

It was recommended that a Resilience Intel framework operate across three major areas of action, as distinct but mutually reinforcing:

Policy — the policy environment and its impact on climate-smart investment and ground-level actions

What connects these three areas of action is the question of where and how durable value comes into being.

High Finance & the Last Mile

Smart design of this “resilience intelligence engine” will provide an evolving synaptic map of interacting value-building influences. This combined information exchange and visual-relational map will effectively make visible the invisible drivers of macro-critical resilience and provide an increasingly reliable source of information about the XROI of a given investment.

To not only reach, but to value, empower and reward, entrepreneurial action among the unbanked and the underbanked — to deliver clean energy, smart sharing of data, and economic empowerment — would constitute one of the biggest investment opportunities in world history. To unlock that value, finance institutions need to see, understand, and empower, at the micro-scale, people they have never before directly served.

The Quipu: Ledger-Based Empowerment

The quipu was a system of strings and knots, used for both ceremonial and administrative purposes, in the Inca empire. Tax collectors used quipus to track tributes paid to the Inca, along with geographical, political, security, and other data. Each quipu was coded by its creator, so the information that would be delivered to the Inca was effectively encrypted.

The distribution of unique encryption-protected knowledge across the wider circle of record keepers effectively decentralized power, from an absolute ruler to a wider community of trust. DLT/blockchain technologies can play this role, but would go much further, putting economic and informational power in the hands of millions of people, in a way the Internet only hints at doing.

By sharing storage, data security, and verification rights across thousands or even millions of devices, distributed ledgers mean a record can only be falsified by hacking most of the devices at exactly the same time. To do this by the brute force of rapid-fire non-stop trial and error is estimated to require many times the entire life of our universe, making such a hack mathematically infeasible.

We can now begin to visualize ecological market underpinnings and economy-shaping macro-critical values, in ways that were not previously possible. We can do this by connecting 1) financial projections and returns, 2) macro and micro-economic data, 3) Earth systems science observations, connected to a fourth dimension of relational dynamics information, and a fifth we might call SDG-mapped interactive resilience-enhancement value.

Greening Capital Markets

Capital markets that operate without full knowledge of the interactive macro-critical resilience value of money moving through them will inevitably misallocate vital resources in ways that invite and accumulate structural risks.

Public budgets are now forced to face this crisis of value projection: there is an emerging mathematical imperative to forego short-term benefits of investment in structurally guaranteed high-risk business models that externalize pervasive climate and health-related costs.

This is the guiding logic of the Marrakech Pledge on Greening Capital Markets in Africa and the Green Bond Pledge — both of which point to the higher-value potential of capital directed toward climate-smart future-building.